Does Stock Market Trading Volume Still Matter?

As of late, stock market trading volume has been lethargic and is now far below its 50 and 200 day moving averages.

It’s too early to blame it on the Thanksgiving holiday, so what is going on?

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A look back at recent history reveals we have seen this pattern before. If we look back over the last year, we see that volume has indeed been declining while also below its 50 day MA two other times, both leading into shot term market (NYSEARCA:TZA) tops.

Does Volume Matter?

Many have considered the bearish (NYSEARCA:SH) volume signals of late to be “dead” since the weekly and monthly longer term volume numbers many investors follow have been declining for years, yet the market still has risen in price in spite of it.

In my opinion, only in the years ahead, or if volume starts to rise along with the markets, will it be truly acceptable to assume that declining volume is currently providing a false signal. It just hasn’t proven out yet.

In other words the verdict is still out as a large market selloff would actually confirm what the falling volume has been warning of over the past few years, that the current uptrend is very weak and continues to get weaker, with less participants, as suggested by these falling volumes. Just because an extreme is the largest ever, doesn’t invalidate it. A rally to new highs on increasing volume, however, would.

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In the shorter terms the chart below shows that volume has actually been a decent indicator that still signals as it’s supposed to.

A reminder: Declining volume on rising prices is bearish and rising volume on rising prices (NYSEARCA:FDL) is bullish and a sign of a strong trend upward. Rising volume on declines is bearish while falling volume on declining prices is bullish. Strong trends have more and more participants chasing price (volume increases). Less strong trends have fewer and fewer participants chasing price (volume declines).

Over the short term as the chart above displays, declining volume occurring below the 50 day (blue lines drawn on the chart above) has actually been a good indicator not to chase prices (NYSEARCA:RSP) higher as a pullback typically follows. We could have been witnessing the start of such a pullback on Thursday, Nov 13.

In addition to the volume warnings, the chart outlines two other bearish technical patterns which I have discussed in more detail in my twice weekly published Technical Forecast where I have suggested buy signals for specific ETFs for both conservative and aggressive traders. Taken as a whole the onus of risk is now back on the bulls (NYSEARCA:FYX) as bears await confirmation these warning signs are indeed playing out.

The ETF Profit Strategy Newsletter utilizes technical, fundamental, and sentiment analysis to keep our subscribers ahead of the markets’ trends. Volume again is declining as price rises. Is this another warning as it was back in February and August?